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11/26/2012 @ 10:35AM1,983 views

McGraw-Hill Unloads Education Business for $2.5 Billion

NEW YORK, NY - SEPTEMBER 12: A pedestrian walks by the McGraw-Hill headquarters on September 12, 2011 in New York City. (Image credit: Getty Images via @daylife)

McGraw Hill said today that it would sell its once-core textbook publishing business for $2.5 billion as it focuses on growing through its Standard & Poors ratings division. The company says it entered into an agreement with Apollo Global management, and expects the deal to close in late 2012 or early 2013 (release below). The division booked $2.3 billion in revenues last year, according to Bloomberg.

The sale of its education division brings McGraw Hill far closer to a total transformation of its business, a shift that started with the sale of beleaguered BusinessWeek to Bloomberg for almost nothing plus the assumption of debt. But while S&P has been a faster-growing part of the company’s business than the legacy divisions, it is not without its risks. Critics scalded S&P for its role in fostering the loose credit environment which brought on the crisis of 2008.

The move also comes amid radical shifts to the education business, with online start-ups and top-flight colleges pushing more and more students to the Internet for low- and n0-cost education, and local school districts across the nation cutting budgets amid financial pressures. Stepped-up competition from players like Pearson, Scholastic and even News Corporation and Apple also threaten to transform the business from its traditional print roots to a digital future.

Here’s the release:

On November 26, 2012, The McGraw-Hill Companies, Inc., a New York corporation (the “Company”) and certain subsidiaries (collectively, the “Sellers”), along with McGraw-Hill Education LLC, entered into a Purchase and Sale Agreement (the “Purchase Agreement”) with MHE Acquisition, LLC (the “Purchaser”), an entity wholly-owned by investment funds managed by affiliates of Apollo Global Management, LLC. Pursuant to the Purchase Agreement, the Purchaser will acquire certain subsidiaries of the Company (the “Education Group”) engaged in the education business (the “Education Business”) for $2.5 billion (the “Transaction”), consisting of $2,250 million in cash and $250 million in senior unsecured notes, the terms of which are described below. The purchase price will also be subject to purchase price adjustments as described further in the Purchase Agreement. The Company estimates that its proceeds from the Transaction will be approximately $1.9 billion net of tax and closing adjustments. The transaction is expected to close in late 2012 or early 2013.

As part of the consideration for the Transaction, the Purchaser will issue to the Company or one or more of its designated affiliates senior unsecured notes in an aggregate principal amount of $250 million (the “Seller Notes”). The Seller Notes will bear interest at a rate of 8.5% per annum until the fifth anniversary of the Closing and 11.0% per annum thereafter. Interest on the Seller Notes will be compounded semi-annually and will be payable in cash or in kind, at the election of the Purchaser, until the fifth anniversary of the Closing and in cash thereafter. The Purchaser may redeem the Seller Notes, in whole or in part, at any time, at par, plus accrued and unpaid interest to the redemption date, plus, after the fifth anniversary of the Closing, a premium declining over time to zero. The Seller Notes will mature 8� years after the Closing and will be subject to mandatory redemption (or a mandatory offer to repurchase) upon the occurrence of certain events, including a change of control. Furthermore, upon the occurence of certain events, the interest rate applicable to the Senior Notes may become 11.0% per annum and the redemption premium may begin to apply prior to the fifth anniversary of the Closing.

Consummation of the Transaction is subject to certain customary closing conditions, including, among others, the expiration of the HSR waiting period and the receipt of regulatory approvals in certain foreign jurisdictions. The obligations of the parties to close the Transaction are also subject to the accuracy of representations and warranties of, and compliance with covenants by, the other party as set forth in the Purchase Agreement (in each case subject to materiality) and, in the case of the Purchaser’s obligations, the absence of any material adverse change affecting the Education Group.

The Purchase Agreement contains customary indemnification obligations of each party with respect to breaches of their respective representations, warranties and covenants, and certain other specified matters and generally provides that the Company will indemnify the Purchaser for liabilities not related to the Education Business and the Purchaser will indemnify the Company for liabilities related to the Education Business.

The parties to the Transaction have made customary representations and warranties, and covenants, including with respect to the conduct of the Education Business during the interim period between the execution of the Purchase Agreement and the Closing.

The representations, warranties and covenants set forth in the Purchase Agreement have been made only for the purposes of such agreement and were solely for the benefit of the parties to the Purchase Agreement, may be subject to limitations agreed upon by the contracting parties, including being qualified by confidential disclosures, may have been made for the purposes of allocating contractual risk between the parties to the Purchase Agreement instead of establishing these matters as facts, and may be subject to standards of materiality applicable to the contracting parties that differ from those applicable to investors. Accordingly, the Purchase Agreement is included with this filing only to provide investors with information regarding the terms of the Purchase Agreement, and not to provide investors with any other factual information regarding the parties or their respective businesses, and should be read in conjunction with the disclosures in the Company’s periodic reports and other filings with the Securities and Exchange Commission.

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